Uncertainties over Paulson’s bank bailout plan

The Bush administration’s decision to bail out the banks was a case of desperate times calling for desperate action. The White House was faced with a dilemma: let the market correct itself at the risk of total collapse of the financial system, or intervene with a gargantuan cash injection at the taxpayer’s expense. They opted for the latter.

Paulson said: “To restore confidence in our markets and our financial institutions so they can fuel continued growth and prosperity, we must address the underlying problem. The federal government must implement a programme to remove these illiquid [sic] assets that are weighing down our financial institutions and threatening our economy.”

Under the Paulson plan up to 700 million dollars – around 475 billion euros – will be diverted from the public coffers to buy bad mortgage debt, the famous ‘toxic assets’. The scheme applies to debts created before September 17 and only major US-based organisations are eligible. It will run for the next two years.

Paulson and Federal Reserve Chairman Ben Bernanke want Congress to approve the plan as soon as possible, warning of “serious consequences” if it is delayed.

The legislators have vowed to move quickly but also are insisting on changes. These include more safeguards for taxpayers and limits on compensation for executives of firms offloading their bad assets onto the government.

One leading Democrat senator described the initiative as “stunning and unprecedented in its scope and lack of detail.”

Others, like Hillary Clinton, have called for the revival of a Depression-era plan to help home owners. “The original home owners loan corporation saved one million homes and returned a profit to the Treasury. Now with today’s ownership rate, a modern day equivalent, could roughly save three times as many homes and more importantly stabilise the housing market.”

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